Short-Term Treasury Bonds Climb

Prices for shorter-term U.S. Treasury bonds were sharply higher Tuesday, amid revived credit concerns and sharp losses in stocks.At 5 p.m the 10-year Treasury note was up $4.38 per $1,000 in face value,or 14/32 point, from its level at 5 p.m. Monday. Its yield, which moves in the opposite direction, fell to 4.52 percent from 4.57 percent. The 30-year bond rose 2/32 point. Its yield fell to 4.85 percent from 4.86 percent. The 2-year note rose 8/32 point. Its yield fell to 4.08 percent from 4.22 percent.
Yields on 3-month Treasury bills were 4.18 percent as the discount rate fell 0.28 percentage point to 4.07 percent.

Worries about credit and the ultimate effect of the subprime mortgage market woes were once again driving financial markets, with stocks plummeting late in the day and investors flocking to safe haven of Treasury bonds. The sharp moves have come in a very illiquid week for markets, with many investors and traders away from the office on holiday.

"Stock markets are having a rough day, and there are more stories about portfolios doing badly," said Scott Gewirtz, head of Treasury trading at Lehman Brothers.

Strategists pointed to several pieces of negative news that pushed bond prices higher, and stocks lower, including a report the Boston Globe posted on its Web site Tuesday that State Street Corp.'s Limited Duration Bond Fund, which managed $1.4 billion for institutional clients, lost about 37 percent of its value in the first three weeks of August. According to the report, the fund's large losses may have been caused by investments in mortgage-related securities, and leveraging, which magnified the problems. Strategists also said news that Merrill Lynch had downgraded Citigroup Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. to "Neutral," from "Buy," was unsettling for market participants.

Treasurys gains have "basically just been a resumption of the safe haven bid," said John Canavan, market analyst at Stone & McCarthy in New York, adding that T-bills have been particularly sensitive to such moves. "Any type of safe haven bid gets the bill sector prepared for more," Canavan said.

Also Tuesday, the Federal Open Market Committee's August meeting minutes showed that central bankers were concerned enough about the recent financial market turmoil to consider they may need to take policy action. To help ease conditions, the Fed subsequently cut the discount-window rate by half a percentage point to 5.75 percent, and extended the borrowing term to 30 days, a term that is renewable by the borrower.

In the minutes, the Fed continued to point to inflation as a "predominant concern." Ten days after the meeting, however, the Fed - in conjunction with lowering the discount rate - issued a separate statement that warned economic risks had risen "appreciably," making no reference to inflation.

With Treasurys higher, but not radically so, after the release of the minutes, David Ader, head of government bond strategy at RBS Greenwich Capital, said that "this now looks like old news." The Fed has already responded, and "we now must wait to see what the markets do vis-a-vis liquidity and how the data shapes up," Ader said. He noted an overall volume Tuesday of around 82 percent of the average, "so hardly busy."